From: "Paul E" 
Newsgroups: misc.invest.financial-plan
Subject: Re: Variable Annuities - Living Benefits
Date: Fri, 2 Jan 2004 15:16:29 CST
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Caroline,

I just bought a  Hartford Variable Annuity product called The Director, and
the principle guarantee feature is called 'Principle First'.  In answer to
your questions:

> In what do annuity companies invest a client's principal?

In the one I just did, i have a choice of a couple dozen mutual funds,
managed mostly by Wellington Mgmt, covering most of the investment types. If
you need a larger asst of funds to choose from, for whatever reason,
Hartford offers a product called 'Leaders' instead of 'Director' which
offers funds from AIM, MFS, and others, which broaded the scope. I found
more than enough within the Director product so I stayed there.

> How do annuity companies make money from a client's principal?

One of the financial pros will answer this better than I do. I do know the
fees involved must be included in a partial answer of thise question. In my
case, theres a 1.15% M&E charge, plus a .35% fee for the 'Principle First'
principle protection rider.  For lesser accts, there is also a 30$ annual
maintenance fee.  But those are the major fees so far as I could tell. There
are also early withdrawal decreasing 'surrender' charges which start at 7%
for the first 3 yrs, and decline to zero at 7 years for moneys withdrawn
beyond10% until that period is passed.

>>> Does a client get back all of his or her principal? Or is there a risk
he/she
> (or his her heirs) won't get it all back?<<

That was a key question for me. And under separate cover (separate because
the newsgroup wont allow me to send a pdf file), Ill email you an adobe pdf
file which is an example of how a $200k investment into this Hartford
Director VA product with 'Principle First' guarantee would have faired over
the last 10 years.  In essence, yes, you are guaranteed to get back all your
principle. An example in my materials is given in a market which crashed to
the tune of 25% a year for a number of years. The way the plan works, 1n
14.2 years of withdrawing a 7% benefit payment annually, you get your entire
principle back; this opposed to someone just leaving their $200k principle
in a stock market acct. In that case, the person loses it all in about 6
years.  Or take the person withdrawing $14k per year on the crashing market
scenario... Hed only recover about $75k before he too was wiped out.  Of
course, Ed in the NG brought up how under such dire circumstances, the odds
are very great the the insurance company would be unable to keep up with
their payout demands.  But thats speculation; all I can tell you is how its
supposed to work, and thats what the agreement you sign says.

In my case, this plan is ideal because at 54, I was laid off last year, and
despite some othe rincome, I have a budget shortfall of about $12k, but an
young enough so that i need to be able to take advantage of market growth.
This product comes along, guaranteeing me $14k per year as a benefit
payment, while offering me market rate returns.  Im not a financial pro, and
neither are you, and sometimes, it gets very difficult to do a proper
analysis on these things. I wouldnt know a monte carlo simulation if it bit
me on the arse, although I do know it can be a valuable tool.  At any rate,
youll get all kinds of professionally correct answers to your questions,
that will probably be more accurate than mine. but in mine, at least you get
an answer you can understand :)

Paul E


"Caroline"  wrote in message
news:BIkJb.16452$lo3.7319@newsread2.news.pas.earthlink.net...
> "Brent D. Gardner, ChFC"  wrote
> > "Caroline"  wrote
> > > Can you say why a person should choose an annuity over, say, a bond
ladder
> > (with
> > > a maximum bond maturity of 20 years or more)?
> >
> > Well, the subject here is variable annuities, not fixed, although the
GPAF
> > rider is for current income.
> >
> > > My rough impression is that the advantage of the annuity is it might
pay
> > better
> > > income than the bond ladder, but at somewhat greater risk. Or, if the
risk
> > is
> > > about the same, then as you say the tradeoff instead is the various
> > annuity
> > > fees.
> >
> > I'd say that an annuity has LESS risk than a bond ladder, unless the
> > investor has a few hundred million (or a few billion). Diversification
alone
> > makes the general account of a large insurance company less risky than
the
> > typical investor buying individual issues.
>
> Sounds like the same advantage a mutual fund has over buying stocks of a
few
> companies. Correct?
>
> snip to keep focus
> > > I think all of these are easily answered with a mutual fund, stock, or
> > bond
> > > ladder. If I can't get easily understood answers to these questions
for an
> > > annuity, I would never feel comfortable buying into one.
> >
> > Answers to most questions are easy, as long as one knows where to go to
ask.
> > Annuities are more complex than investment companies, or individual
issues.
>
> In what do annuity companies invest a client's principal?
>
> How do annuity companies make money from a client's principal?
>
> Does a client get back all of his or her principal? Or is there a risk
he/she
> (or his her heirs) won't get it all back?
>
> I just want basic answers. I realize there are always exceptions to the
rule.
> But if someone can capsulize what an annuity is (in the same way I could
> capsulize what a mutual fund, stock, or bond ladder is), then this would
be
> helpful.
>
> I have seen on the Internet that an IRA paying out the annual maximum to
someone
> in, say, their 70s is effectively a type of annuity. Correct?
>
> > There are 1,800 insurance companies, roughly. Around 40 sell Fixed Index
> > Annuities. Most life companies sell plain vanilla fixed annuities.
Almost as
> > many sell variable annuities. Plus, there are both deferred and
immediate
> > versions of all three generic types. Because it is an insurance contract
> > with contractual provisions that are not easily delineated by numbers on
a
> > spreadsheet, its very difficult to provide an online resource that
addresses
> > all their particular, much less their suitable uses in financial and
> > retirement planning.
>
> I don't want particulars. I want to know how in general annuity companies
make
> money from issuing annuities.
>
> So far my impression is that annuities are little different from a
conservative
> mutual fund set up for high dividends (and/or interest? can't say until
you tell
> me where the principal is invested) and thus income (if the investor does
not
> want to re-invest). Some annuities will put more emphasis on growth, but
this is
> at higher risk to the investor.
>
> > If you have specific questions, ask them here.
>